CGT when can it be paid (Signing of Contract or at Settlement in 3 Years)

[carlau]

I've seen a Taxation Lawyer about this and his answer was that the CGT needs to be paid that Financial year that the contract was signed.

Then later that afternoon I received a phone call from the Taxation Lawyer who did some more research and said the CGT can be paid at Settlement as long as the 2006-2007 Tax Return is amended as its a 3 year contract and the payment is over a 3 year period and the CGT to paid within 30 days of settlement so you avoid the 13% Interest that the ATO would hit you with.

Could anyone clear this up for me and shed some more light on this as I've heard different stories from many different Accountants.

 

[julia]

The later statement by your tax lawyer is correct

The ATO's Guide to capital gains tax says in chapter 6

You are not required to include any capital gain or capital loss on your tax return for the relevant year until an actual change of ownership occurs. When settlement occurs, you must include any capital gain or capital loss in the year of income in which the contract was made. If an assessment has already been made for that year of income, you may need to have that assessment amended.

Julia
www.bantacs.com.au

 

[Doug]

The law is quite clear and CGT is always assessed in the income year of signing the contract - or if no contract at settlement.

This obvousily may give rise to situations (as it would appear in yours) whereby tax would be payable before receipt of proceeds. You're therefore allowed to "defer" assessment until settlement by amending your tax return.

 

[windsor]

The law is quite clear and CGT is always assessed in the income year of signing the contract - or if no contract at settlement.

This obvousily may give rise to situations (as it would appear in yours) whereby tax would be payable before receipt of proceeds. You're therefore allowed to "defer" assessment until settlement by amending your tax return.

This obvousily may give rise to situations (as it would appear in yours) whereby tax would be payable before receipt of proceeds.

Just following this thread, as Im interested in purchasing land around that area.

So would carlau have to make payment of any CGT at the signing of the contract and not at settlement?

 

[carlau]

This obvousily may give rise to situations (as it would appear in yours) whereby tax would be payable before receipt of proceeds.

Just following this thread, as Im interested in purchasing land around that area.

So would carlau have to make payment of any CGT at the signing of the contract and not at settlement?

Now after getting advise from another Taxation Lawyer, the CGT is to be paid that year I sign the contract.

Go figure, the first Taxation Lawyer was unsure so I got another Taxation Lawyer's advise. The 2nd Taxation Lawyer told me that the CGT has to be paid when the contract is signed and not the settlement.

Would the ATO give time extension to CGT, as the first Taxation Lawyer that I had seen told me that they would not give me payment extension on CGT. If I was a business then yes or on my taxable income they would but in the matter of CGT he said no.

If I can get some input from other Accountants on this matter of time extension on CGT that would be helpful.

 

[Doug]

Julia has already given you the answer:

Quote:

You are not required to include any capital gain or capital loss on your tax return for the relevant year until an actual change of ownership occurs

 

[carlau]

Julia has already given you the answer:

Quote:

You are not required to include any capital gain or capital loss on your tax return for the relevant year until an actual change of ownership occurs

This gets more and more confusing.

I've seen 2 Taxation Lawyers here in Melb and the 1st Taxation Lawyer said that I can make the CGT payment on Settlement.

The 2nd Taxation Lawyer said I have to pay the CGT at the signing of the Contract and NOT the Settlement.

So I have 2 different answers from 2 highly qualified City Taxation Lawyers that charge a arm and leg.

The 1st Taxation Lawyer will do a Sign Off that the CGT can be paid at Settlement and the 2nd Taxation Lawyer will do a Sign Off saying that the CGT is payable the year the contract is signed.

 

[Francesco]

Hi Carlau

Is it just a matter of misunderstanding? CG is calculated back from the day when the contract is signed, which determines the duration of having the investment. A CG event occurs when you subsequently sell. Lawyer 2 may be referring to the date of first having the investment and the other lawyer may be referring to the subsequent date of actually selling the investment.

Hope this helps. Cheers

F

 

[carlau]

Julia has already given you the answer:

Quote:

You are not required to include any capital gain or capital loss on your tax return for the relevant year until an actual change of ownership occurs

This gets more and more confusing.

I've seen 2 Taxation Lawyers here in Melb and the 1st Taxation Lawyer said that I can make the CGT payment on Settlement.

The 2nd Taxation Lawyer said I have to pay the CGT at the signing of the Contract and NOT the Settlement.

So I have 2 different answers from 2 highly qualified City Taxation Lawyers that charge a arm and leg.

The 1st Taxation Lawyer will do a Sign Off that the CGT can be paid at Settlement and the 2nd Taxation Lawyer will do a Sign Off saying that the CGT is payable the year the contract is signed.

I was granted a Option by a developer that he will buy the Lot of Land if the Government change the farming to residential use which happened late last year, so I think that's why its confusing the Taxation Lawyers and I'm getting different answers as from the "Option I enter into a Contract".

If land is disposed of under a contract, it is taken to have been disposed of when the contract is entered into – not the settlement date. The fact that a contract is subject to a condition, such as finance approval, will generally not affect this date.

In this clause above it really doesn't stat that much. Would you call a Option a Contract ?? if so then you would require to pay the CGT when the contract is entered into. Then I can say the Contract is attached to the Option which could possibly cause it to be disposed of when the contract is entered into also becauce the Contract is attached to the Option. I'm no expert .

 

[carlau]

Hi Carlau

Is it just a matter of misunderstanding? CG is calculated back from the day when the contract is signed, which determines the duration of having the investment. A CG event occurs when you subsequently sell. Lawyer 2 may be referring to the date of first having the investment and the other lawyer may be referring to the subsequent date of actually selling the investment.

Hope this helps. Cheers

F

I wish that was the case. But I can assure it isnt, as I went over this with them many times to make sure. And they both have different views and thats worrying.

 

[Doug]

Hope this helps:

CGT Determination Number 16
TD 16

Capital» «Gains»: What is the date of acquisition (or date of disposal) of an asset acquired (or disposed of) on the exercise of an «option»?


This ruling contains references to repealed provisions, some of which may have been rewritten. The ruling still has effect. Paragraph 32 in TR 2006/10 provides further guidance on the status and binding effect of public rulings where the law has been repealed or repealed and rewritten. The legislative references at the end of the ruling indicate the repealed provisions and, where applicable, the rewritten provisions.


FOI status: may be released



1. Where an «option» is exercised, the acquisition (or grant) of the «option» and the transaction entered into in exercising the rights and obligations under the «option» are treated as a single transaction (subsections 160ZZC(7) and (8)).

2. The date of acquisition (or date of disposal) of the asset is the date, determined in accordance with section 160U, of the transaction entered into as a result of the exercise of the «option».
Note:
This Determination applies whether or not the «option» was granted pre or post-CGT.


Example:

On 1 April 1990, a landowner grants a taxpayer an «option» to buy his or her property before 30 June 1991 for $100,000.
The «option» fee is $10,000.
The taxpayer exercises the «option». The contract for the sale of the «land» pursuant to the exercise of the «option» is executed on 1 June 1991.
The date of the taxpayer's acquisition of the «land» is 1 June 1991, the date the contract for sale of the «land» was made (subsection 160U(3)). Correspondingly, this will also be the date of disposal for the vendor landowner.
Commissioner of Taxation
31 October 1991

References
ATO references:
NO BRIS LAF

FOI number: I 1019062

ISSN 1037 - 1419

Subject References:
Date of acquisition;
Exercise of an «option

Legislative References:
160ZZC, [Repealed]
160U [rewritten as ITAA 97 104; 109]

 

[carlau]

Hope this helps:

CGT Determination Number 16
TD 16

Capital» «Gains»: What is the date of acquisition (or date of disposal) of an asset acquired (or disposed of) on the exercise of an «option»?


This ruling contains references to repealed provisions, some of which may have been rewritten. The ruling still has effect. Paragraph 32 in TR 2006/10 provides further guidance on the status and binding effect of public rulings where the law has been repealed or repealed and rewritten. The legislative references at the end of the ruling indicate the repealed provisions and, where applicable, the rewritten provisions.


FOI status: may be released



1. Where an «option» is exercised, the acquisition (or grant) of the «option» and the transaction entered into in exercising the rights and obligations under the «option» are treated as a single transaction (subsections 160ZZC(7) and (8)).

2. The date of acquisition (or date of disposal) of the asset is the date, determined in accordance with section 160U, of the transaction entered into as a result of the exercise of the «option».
Note:
This Determination applies whether or not the «option» was granted pre or post-CGT.


Example:

On 1 April 1990, a landowner grants a taxpayer an «option» to buy his or her property before 30 June 1991 for $100,000.
The «option» fee is $10,000.
The taxpayer exercises the «option». The contract for the sale of the «land» pursuant to the exercise of the «option» is executed on 1 June 1991.
The date of the taxpayer's acquisition of the «land» is 1 June 1991, the date the contract for sale of the «land» was made (subsection 160U(3)). Correspondingly, this will also be the date of disposal for the vendor landowner.
Commissioner of Taxation
31 October 1991

References
ATO references:
NO BRIS LAF

FOI number: I 1019062

ISSN 1037 - 1419

Subject References:
Date of acquisition;
Exercise of an «option

Legislative References:
160ZZC, [Repealed]
160U [rewritten as ITAA 97 104; 109]

Correspondingly, this will also be the date of disposal for the vendor landowner.

So basically its saying yes the CGT is paid once the contract is entered into even though the title hasn't changed hands and settlement hasn't happened.

So that seller would require to file the CGT for that financial year being 1990-1991 and require to pay the CGT for that financial year.

Please correct me if I'm wrong as I'm no expert.

 

[coastymike]

Disposal in one year but settlement taking place in a later year of income

A capital gain or capital loss occurs if a CGT event happens to a CGT asset (section 102-20 of the ITAA 1997).

CGT event A1 in section 104-10 of the ITAA 1997 happens if you dispose of a CGT asset that you own. You are taken to have disposed of an asset if there is a change of ownership of the asset from you to another entity (subsection 104-10(2) of the ITAA 1997). The time of the event will normally occur at the time that you enter into a contract for the disposal of the asset (paragraph 104-10(3)(a) of the ITAA 1997).

This is supported by the comments of paragraph one of Taxation Determination TD 94/89 when it states that:

Where a contract is settled in a later year of income, a taxpayer is required to include a capital gain or loss in the year of income in which the contract is made, not in the year of income in which the contract is settled.

As stated in TD 94/89 where a contract is settled in a later year of income, you are required to include your capital gain or capital loss in the year of income in which the contract is made, not in the year in which the contract is settled.

In your case, the contract will be entered into in a specific income year. When settlement occurs, you are then required to include any capital gain or capital loss in the year of income in which the contract was made (subsection 104-10(3) of the ITAA 1997). However, TD 94/89 provides that you do not have to include the capital gain or capital loss until settlement has actually occurred.

Will the Commissioner amend the return and exercise his discretion to remit penalties?

Paragraph five of TD 94/89 states that:

Where an assessment is amended to include a net capital gain, and a liability for interest arises under subsection 170AA (1), the remission of interest will be dealt with in each case on its own merits. The lawyers probably expect that the discretion in subsection 170AA(11) would ordinarily be exercised to remit the interest in full where requests for amendment are lodged, and where relevant, self-amendments are made, within a reasonable time after the date of settlement. In most instances, the ATO considers a period of one month after settlement to be a reasonable period.

Providing that the request for amendment is lodged within a period of one month after settlement, then a full remission may apply, otherwise the request will be determined on its merits.

 

[carlau]

Disposal in one year but settlement taking place in a later year of income

A capital gain or capital loss occurs if a CGT event happens to a CGT asset (section 102-20 of the ITAA 1997).

CGT event A1 in section 104-10 of the ITAA 1997 happens if you dispose of a CGT asset that you own. You are taken to have disposed of an asset if there is a change of ownership of the asset from you to another entity (subsection 104-10(2) of the ITAA 1997). The time of the event will normally occur at the time that you enter into a contract for the disposal of the asset (paragraph 104-10(3)(a) of the ITAA 1997).

This is supported by the comments of paragraph one of Taxation Determination TD 94/89 when it states that:

Where a contract is settled in a later year of income, a taxpayer is required to include a capital gain or loss in the year of income in which the contract is made, not in the year of income in which the contract is settled.

As stated in TD 94/89 where a contract is settled in a later year of income, you are required to include your capital gain or capital loss in the year of income in which the contract is made, not in the year in which the contract is settled.

In your case, the contract will be entered into in a specific income year. When settlement occurs, you are then required to include any capital gain or capital loss in the year of income in which the contract was made (subsection 104-10(3) of the ITAA 1997). However, TD 94/89 provides that you do not have to include the capital gain or capital loss until settlement has actually occurred.

Will the Commissioner amend the return and exercise his discretion to remit penalties?

Paragraph five of TD 94/89 states that:

Where an assessment is amended to include a net capital gain, and a liability for interest arises under subsection 170AA (1), the remission of interest will be dealt with in each case on its own merits. The lawyers probably expect that the discretion in subsection 170AA(11) would ordinarily be exercised to remit the interest in full where requests for amendment are lodged, and where relevant, self-amendments are made, within a reasonable time after the date of settlement. In most instances, the ATO considers a period of one month after settlement to be a reasonable period.

Providing that the request for amendment is lodged within a period of one month after settlement, then a full remission may apply, otherwise the request will be determined on its merits.

Thanks for posting this coastymike.

So I file the CGT made when I sign the contract, but don't make any payment of the CGT until Settlement occurs but amend the assessment and at settlement work out any capital gain or loss? or cant I do this as basically its saying that Settlement has occurred when I signed the Contract.

The way I'm reading it is that Settlement occurs with me when I sign the Contract or enter into a Contract, sorry just confusing for me. So basically I cant calculate any Capital gain or loss after signing the Contract.

So for example lets say I sign the Contract being 15 Dec 2006, the latest I could make payment of any CGT would be March 2008, what happens if the full amount of CGT can NOT be paid all at once will the ATO give a 7 month extension if needed ??

In your case, the contract will be entered into in a specific income year. When settlement occurs, you are then required to include any capital gain or capital loss in the year of income in which the contract was made (subsection 104-10(3) of the ITAA 1997). However, TD 94/89 provides that you do not have to include the capital gain or capital loss until settlement has actually occurred.

 

[julia]

You cannot calculate exactly how much the capital gain is until settlement occurs ie rates adjustment legal fees, contract falling through etc. So the ATO quote I gave you makes a very stupid law workable.
You have entered into the contract when the option is exercised not when you enter into the option. So lets say the option is exercised in the 2007 financial year but your settlement doesn't occur until the 2010 financial year. You lodge your 2007 tax return ignoring the sale. In 2010 when the settlement occurs you have 30 days to go back an amend your 2007 tax return to include the capital gain. The ATO will then issue you a new assessment for 2007 with the extra tax which you then pay which means you did not pay the CGT until 2010 but was assessed on it in 2007. It maybe your misunderstanding of the difference between being assessed and actually paying that may mean you are misunderstanding what the tax lawyers are saying.

Julia
www.bantacs.com.au

 

[carlau]

You cannot calculate exactly how much the capital gain is until settlement occurs ie rates adjustment legal fees, contract falling through etc. So the ATO quote I gave you makes a very stupid law workable.
You have entered into the contract when the option is exercised not when you enter into the option. So lets say the option is exercised in the 2007 financial year but your settlement doesn't occur until the 2010 financial year. You lodge your 2007 tax return ignoring the sale. In 2010 when the settlement occurs you have 30 days to go back an amend your 2007 tax return to include the capital gain. The ATO will then issue you a new assessment for 2007 with the extra tax which you then pay which means you did not pay the CGT until 2010 but was assessed on it in 2007. It maybe your misunderstanding of the difference between being assessed and actually paying that may mean you are misunderstanding what the tax lawyers are saying.

Julia
www.bantacs.com.au

Hi Julia,

The first Taxation Lawyer I had a meeting with told me, these exact words.

I will need to pay the CGT that financial year that the contract is signed and place the first 10% payment aside into account as it wont be enough to cover the CGT and borrow the remaining funds if I can to cover the complete cost to pay the CGT.

He stated that if the contract is signed in the financial year of 2006-2007 that I will receive a assessment from the ATO "he told me that if after the assessment arrives in March 2008 for the CGT and I dont make payment they will issue a notice for me to pay the CGT within a certain date, I think it was 1 month and if I didn't pay the CGT then I would be looking at major problems with the ATO, I didn't go into detail what the ATO would do but was warned that if I didn't pay it wouldn't be nice and that the ATO would make my life hell.

I asked him about if I could ask the ATO about time extension to pay, and his words to me were that if I was business they would allow time extension to make payment, but since this is a private sale and our main residence that the ATO will look at it differently as they have all this money coming in and wont allow for time extension to pay.

He went away to look through the tax law book on CGT and then changed his story saying that we can make payment at the end of settlement in 3 years time but was not 100% sure and told me he would need to call me back in a few hours to confirm this.

He called later that afternoon and told me that I could pay the CGT at the end of settlement and I have 30 days to do so to avoid being hit with the 13% interest.

Now to the 2nd Taxation Lawyer, he clearly stated to me that the CGT needs to be paid when I sign the contract and have until March 2008 to do so. That's 2 different stories. I mentioned to him the name of the Taxation Lawyer that I went and had the meeting with and what advise he had given me and his answer was to me today that is wrong I will need to pay CGT at when I sign the Contract and NOT in 3 years time when settlment occurs.

Another Property Lawyer at Freehills down here in Melbourne told me stories of how some people like myself had to take out loans to cover the CGT to be paid within that financial year that the contract was signed and not at settlement.

Julia, I just want to be 100% sure. I've asked both the Taxation Lawyers if I can make the CGT payment when settlement occurs in 3 years from signing the contract, the 1st Taxation Lawyer first said NO at paying the CGT at Settlement in 3 years time and then later he called and changed that to YES I can.

And the 2nd Taxation lawyer I asked the exact same thing if the CGT can be paid at settlement in 3 years from signing the contract and his answer was a straight out NO I cant.

Unless the large firms want to place fear into me and charge me through the roof for seeing and get me going back to them.

 

[carlau]

After having a good read I will stick with what the first Taxation Lawyer said and I will get the sign off from the Taxation Lawyer "That I will pay the CGT in 2010 when the final payment is made and ownership is transferred".

So this matter can placed at rest.
"That I will pay the CGT in 2010 when the final payment is made and ownership is transferred".

Thank you to all that have Helped me on this.

And thank you again Julia for being so helpful and if ever your in Melb make sure to send me a PM would like to meet you one day.

Just one other question. Can I for the 3 years from signing the contract to 2010 when I receive my final payment add to my Cost Base the items listed below.

-Insurance
-Council Rates
-Maintenance
-Interest on any money borrowed
-Stamp Duty
-Solicitors
-Tax Lawyers
-Accountant

 

[julia]

Carlau,

Accountant and tax lawyer you claim in the year you spend the money the other expense continue to get added into the cost base and will eventually be included in the 2006/07 amendment.
You should send those tax lawyers a copy of the ATO booklet opened at chapter 6 to save anyone in the future suffering the same. Make sure you also send them a bill for your time.

Julia
www.bantacs.com.au